Afrinvest Weekly Update | 2024 Budget Revision: Is Bigger Better?
An Extraction of the Afrinvest Weekly Economic & Market Report for January 5, 2024
Photo Credit: The Senate
We opened the account for our weekly economic analysis for the year with the assessment of the upwardly reviewed ₦28.8tn 2024 fiscal plan, signed into law by President Bola Ahmed Tinubu on Monday. The initial budget of ₦27.5tn was raised by ₦1.2tn by the National Assembly (NASS) following revisions to revenue expectations and reprioritisation of spending focus in favour of capital projects. Precisely, the NASS raised allocation for capital expenditure by 14.9% to ₦10.0tn while recurrent spending was trimmed by 11.7% to ₦8.8tn. Also, the sums of ₦8.3tn and ₦1.7tn were approved for debt servicing and Statutory transfers respectively.
On the revenue side, key changes to the budget assumptions include adjustment of exchange rate and real GDP growth to ₦800.00/$ and 3.9% respectively against the initial outlook of ₦750.00/$ and 3.8%. Meanwhile, oil revenue assumptions of $77.96/bbl price and 1.78mbpd production were left intact. Based on the revision, the FG estimates FY 2024 budget deficit at 3.9% of GDP.
While we applaud the recalibration of the budget mix to increase capital budget allocation, we maintain our view that revenue assumptions, especially crude oil revenue forecasts, are overly bullish as noted in the macro section of our recently published 2024 outlook report. In a blue sky scenario, our model suggests that the Naira should trade around ₦911.29/$ - weaker than FG’s projection and positive for Naira earnings from oil sales. Albeit, we expect downward pressure on global oil price and domestic crude output to derail budgeted oil revenue in 2024. Also, our model suggests that budget deficit should exceed ₦13.0tn (budgeted: ₦9.3tn), while annual GDP growth should print at about 3.0% in a base case as against FG's 3.8% projection. We opine that cost-cutting initiatives, full implementation of capex, and fiscal discipline to rein-in on rising debt are sustainable ways to enhance the impact of budget on economic growth.
Source: NASS, Afrinvest Research
In other development, we spotlight the dismal performance of capital importation in Q3:2023 and its implication for outlook. According to data published by the NBS, imported capital fell by 36.5% q/q and 43.6% y/y in Q3 to $654.7m – underperforming even the 2016 recession dip of $711.0m. The record-low flow was mainly triggered by broad weaknesses across portfolio investment (-18.5% q/q and -80.3% y/y) and loans (-34.2% q/q and -18.0% y/y).
Analysis of the data indicated that portfolio investment recorded a growth contribution of -30.6% due to depressed flows into bond securities ($20.6m vs $85.3m in Q2 and $203.8m in Q3:2022) while rotation to money market fell short of historic mark ($58.2m vs $13.0m in Q2 and $231.1m in Q3:2022). Combined with tepid equity securities inflow of $8.4m, total portfolio investment accounted for 13.3% of total capital against 38.1% in the comparable 2022 period. Elsewhere, the “other investment” bucket (growth contribution of -11.0%) was downbeat reflecting weaker inflows via loans ($507.7m and 99.9% of other investment). Overall, the composition of loans in the offshore capital mix rose to a record high of 77.6%, while Foreign Direct Investment (FDI) accounted for 9.1% and portfolio securities made up the balance.
Since the pandemic, offshore capital has steadily dwindled and, at current pace, is on track to print at $3.8bn for FY-2023 (representing 15.7% of its pre-Covid level and 60.8% of our FY forecast of $6.2bn). We attribute the weak Q3 performance to negative shocks from reforms introduced in late Q2 and Q3, which induced a "Wait-and-See" reaction from offshore investors. At the same time, we note diminished confidence – or at least heightened uncertainty – amongst investors following the premature exit of the past CBN Governor. On the global scene, investors adopted a risk-off stance towards the emerging market (EM) securities. Data from International Institute of Finance (IIF) show that excluding July’s $32.8bn inflows into EM, Q3 was dominated by outflows totalling $29.3bn as advanced market interest rates reached their peak. We opine that the combination of initial turbulence from domestic reforms (inflation and exchange rate shocks), institutional and political headwinds alongside global monetary policy normalisation accounted from the Q3 capital inflow fragilities. Looking ahead, the outlook for 2024 supports resurgence in capital inflow premised on (1) Clarity on domestic monetary and FX policy direction (2) Global monetary policy pivot (3) Cheap local assets and (4) Improved domestic macroeconomic fundamentals.